Asian banks faced with inflation dilemma
Saturday, 7 June 2008
Raphael Minder, FT Syndication Service
HONG KONG: Soaring food and energy prices are forcing Asian central banks to confront a difficult dilemma: how to restrain inflation while not derailing economic growth.
Until recently, Asian central bankers have shown little inclination to take centre stage in the fight against rising prices, even though core inflation has been drifting higher in most of Asia since early 2003, with the notable exception of Japan.
Central banks in Indonesia and the Philippines raised benchmark interest rates by 25 basis points last Thursday in the latest sign of policymakers' attempts to counter skyrocketing oil and food prices.
Manila's move, which took rates up to 5.25 per cent, was the first in three years and came after new data showed year-on-year inflation had hit a nine-year-high of 9.6 per cent.
Jakarta's rate rise to 8.5 per cent follows a similar increase last month, which marked the first tightening since December 2005, when rates hit 12.75 per cent. Indonesia's year-on-year inflation in May was 10.38 per cent, the highest since September 2006.
The two countries are facing an increasingly common conundrum for Asian politicians and central bankers.
Taiwan's new premier, Liu Chao-shiuan, last Thursday told the Financial Times that the government had struck a deal with leading retailers to offer rice and other staples at reduced prices in an effort to tame inflation.
His comments coincided with a jump in the island's core inflation rate, which excludes food and energy, from 3.1 per cent to 3.23 per cent, its biggest gain in nearly nine years.
India and Malaysia, which both increased petrol prices this week, are expected to raise rates soon while policymakers in China have been waging war against inflation since last year. Chinese inflation hit 8.5 per cent in April, though Beijing is expected next week to announce a modest reduction for the year to May.
In the main, Asian central bankers have appeared content to support governments pushing for strong domestic growth as a buffer against a US-led slowdown that could undermine exports.
The hope was that a slowdown in other parts of the world would reduce demand enough to keep inflation at bay.
But that calculation has been thrown off course by recent inflation figures that have illustrated the massive impact of soaring energy and food prices on a region that is home to two-thirds of the world's poor.
Even before last Thursday's central bank interventions, calls for action had been growing louder. Last Monday, Goldman Sachs said monetary tightening was "especially urgent", given that nearly all countries in the region had negative real interest rates, "which is clearly not compatible with still solid growth and rising inflationary pressures".
Real interest rates are now negative by an average 1.7 per cent in Asia (excluding Japan), according to UBS, or far below the level both before and in the aftermath of the Asian financial crisis a decade ago.
The task of central bankers has already been complicated in some Asian countries by moves to raise retail fuel prices to cut soaring government spending on subsidies. Asia's oil production is now about a third of the level of oil imports.
Last Wednesday, India joined Taiwan, Malaysia and Indonesia in taking the politically unpopular step of raising prices at the fuel pump. While the retail price increase was relatively modest - between 8.0 and 17 per cent, with an exclusion for paraffin, an essential product for poorer households - it came at a time when Indian inflation already accelerated past the central bank's comfort zone of 5.5 per cent, even recently breaching the 8.0 per cent mark.
Discontent over higher food and fuel costs is also exacerbating political tensions in Malaysia and Thailand, where governments are struggling to maintain their grip on power.
In South Korea, Lee Myung-bak's administration has come under pressure, only 100 days after taking office, amid protests over beef imports. Indonesia and India are both preparing for elections in the coming year that will hinge heavily on impoverished voters and their worries over the cost of food and fuel.
Rob Subbaraman, chief economist for Asia (excluding Japan), at Lehman Brothers, notes: "Indian elections have been won and lost on the price of an onion."
Most economists predict rate rises in a handful of countries, including Taiwan and Thailand. However, the rises are expected to be limited to 25 or 50 basis points - below the expected acceleration in inflation.
Bolder steps by central banks could lead to conflict with governments, especially those that have committed to ambitious growth targets, such as Mr Lee's administration in South Korea.
Korean inflation rose to a seven-year high of 4.9 per cent in April. Yet, according to the April minutes of the central bank's board meeting, two members called for a rate cut to boost growth.
Additional reporting by Kathrin Hille in Taipei, John Aglionby in Jakarta, and Roel Landingin in Manila
HONG KONG: Soaring food and energy prices are forcing Asian central banks to confront a difficult dilemma: how to restrain inflation while not derailing economic growth.
Until recently, Asian central bankers have shown little inclination to take centre stage in the fight against rising prices, even though core inflation has been drifting higher in most of Asia since early 2003, with the notable exception of Japan.
Central banks in Indonesia and the Philippines raised benchmark interest rates by 25 basis points last Thursday in the latest sign of policymakers' attempts to counter skyrocketing oil and food prices.
Manila's move, which took rates up to 5.25 per cent, was the first in three years and came after new data showed year-on-year inflation had hit a nine-year-high of 9.6 per cent.
Jakarta's rate rise to 8.5 per cent follows a similar increase last month, which marked the first tightening since December 2005, when rates hit 12.75 per cent. Indonesia's year-on-year inflation in May was 10.38 per cent, the highest since September 2006.
The two countries are facing an increasingly common conundrum for Asian politicians and central bankers.
Taiwan's new premier, Liu Chao-shiuan, last Thursday told the Financial Times that the government had struck a deal with leading retailers to offer rice and other staples at reduced prices in an effort to tame inflation.
His comments coincided with a jump in the island's core inflation rate, which excludes food and energy, from 3.1 per cent to 3.23 per cent, its biggest gain in nearly nine years.
India and Malaysia, which both increased petrol prices this week, are expected to raise rates soon while policymakers in China have been waging war against inflation since last year. Chinese inflation hit 8.5 per cent in April, though Beijing is expected next week to announce a modest reduction for the year to May.
In the main, Asian central bankers have appeared content to support governments pushing for strong domestic growth as a buffer against a US-led slowdown that could undermine exports.
The hope was that a slowdown in other parts of the world would reduce demand enough to keep inflation at bay.
But that calculation has been thrown off course by recent inflation figures that have illustrated the massive impact of soaring energy and food prices on a region that is home to two-thirds of the world's poor.
Even before last Thursday's central bank interventions, calls for action had been growing louder. Last Monday, Goldman Sachs said monetary tightening was "especially urgent", given that nearly all countries in the region had negative real interest rates, "which is clearly not compatible with still solid growth and rising inflationary pressures".
Real interest rates are now negative by an average 1.7 per cent in Asia (excluding Japan), according to UBS, or far below the level both before and in the aftermath of the Asian financial crisis a decade ago.
The task of central bankers has already been complicated in some Asian countries by moves to raise retail fuel prices to cut soaring government spending on subsidies. Asia's oil production is now about a third of the level of oil imports.
Last Wednesday, India joined Taiwan, Malaysia and Indonesia in taking the politically unpopular step of raising prices at the fuel pump. While the retail price increase was relatively modest - between 8.0 and 17 per cent, with an exclusion for paraffin, an essential product for poorer households - it came at a time when Indian inflation already accelerated past the central bank's comfort zone of 5.5 per cent, even recently breaching the 8.0 per cent mark.
Discontent over higher food and fuel costs is also exacerbating political tensions in Malaysia and Thailand, where governments are struggling to maintain their grip on power.
In South Korea, Lee Myung-bak's administration has come under pressure, only 100 days after taking office, amid protests over beef imports. Indonesia and India are both preparing for elections in the coming year that will hinge heavily on impoverished voters and their worries over the cost of food and fuel.
Rob Subbaraman, chief economist for Asia (excluding Japan), at Lehman Brothers, notes: "Indian elections have been won and lost on the price of an onion."
Most economists predict rate rises in a handful of countries, including Taiwan and Thailand. However, the rises are expected to be limited to 25 or 50 basis points - below the expected acceleration in inflation.
Bolder steps by central banks could lead to conflict with governments, especially those that have committed to ambitious growth targets, such as Mr Lee's administration in South Korea.
Korean inflation rose to a seven-year high of 4.9 per cent in April. Yet, according to the April minutes of the central bank's board meeting, two members called for a rate cut to boost growth.
Additional reporting by Kathrin Hille in Taipei, John Aglionby in Jakarta, and Roel Landingin in Manila